DMC says it offered to buy back Karmanos; McLaren says no sale

After court-ordered mediation failed last month between McLaren Health Care Inc. and Detroit Medical Center in a contract dispute over McLaren's acquisition last December of the Barbara Ann Karmanos Cancer Institute, the two health care systems are headed back to Oakland County Circuit Court to settle their problems.

But two weeks ago, DMC officials said they mailed a letter to Flint-based McLaren that included an offer to buy back Karmanos, located on the DMC campus in downtown Detroit.

McLaren spokesman Kevin Tompkins, in an email to Crain's, said Karmanos is not for sale.

McLaren spokesman Kevin Tompkins

"McLaren Health Care has not received nor is it aware of any offer made by the DMC to purchase Karmanos," Tompkins said. "Karmanos Cancer Institute is a subsidiary of McLaren Health Care and is not for sale."

Conrad Mallett Jr., DMC's chief administrative officer, said DMC's letter to McLaren also contained a request for McLaren to give it an audited financial report of Karmanos and McLaren.

"There is a clause in the contract (between DMC and Karmanos) that says every year Karmanos will give us audited financial report to demonstrate if not more than 5 percent of their business is unrelated to cancer services," said Mallett.

DMC said it sold DMC's cancer business to Karmanos in 2005 for the below-market price of $9.9 million because it included an exclusive affiliation into perpetuity. Karmanos had offered a no-strings $45 million deal for the DMC cancer operations.

Last October, McLaren signed an agreement to acquire Karmanos for an unspecified amount of money but also with a pledge to spend $80 million over the next four years to upgrade Karmanos' downtown hospital and expand outpatient centers in Farmington Hills and Monroe.

"Now that Karmanos is owned by McLaren, we want clarification to their compliance with the contract," Mallett said. "It is fairly clear based on our uneducated understanding of McLaren that their business includes more than 5 percent of non-cancer services."

Conrad Mallett Jr., DMC's chief administrative officer

Mallett said he believes Karmanos now is in violation of the sale and affiliation agreement and contract it signed with DMC nine years ago.

"We would like to discuss buying back the cancer services," Mallett said, adding: "It was inappropriate that Karmanos sold to McLaren."

On the same day McLaren and Karmanos announced they would join forces, McLaren filed a lawsuit against DMC in which it asked the court to declare DMC's 2005 affiliation agreement with Karmanos to be an "unreasonable restrictive covenant" that violates Michigan's antitrust laws.

In its lawsuit, McLaren said it wants to use Karmanos' name on its cancer centers at McLaren Oakland, a hospital in Pontiac; McLaren Cancer Clarkston; and other McLaren health care facilities in Oakland County.

But DMC and Karmanos' 2005 sale agreement also prohibits Karmanos from marketing or advertising its services in Oakland, Wayne or Macomb counties with anyone other than DMC, said DMC in a November court filing.

DMC alleges that Karmanos is liable for breach of contract and McLaren for tortuous interference with its prior agreement with Karmanos. DMC also said its sale agreement with Karmanos also provided that "any breach by Karmanos of any provisions would cause irreparable harm to DMC (and allow for) injunctive relief."

In February, after hearing several months of motions from each side, Judge Wendy Potts ordered the two parties into mediation.

But the mediation failed. Tompkins and Mallett said good-faith effort was made to address the problems, but both sides were too far apart in their positions.

"Everything about this transaction is legitimate and beyond dispute. Everything about this agreement has been done to benefit Karmanos, its clinical and research staff and the communities they serve," Tompkins said.

Mallett said DMC continues to believe it has a valid contract with Karmanos that has been interfered with by McLaren.

"We presented a plan to Karmanos that would have reinvigorated the partnership and created ambulatory opportunities for them across Southeast Michigan," Mallett said. "It was flatly turned down."

Mallett said now the two health systems are headed back to court. He said Potts is expected to rule April 30 on DMC's motion for summary disposition and preliminary injunction to stop further integration of Karmanos into McLaren.

"(McLaren) filed an amended complaint that amped up (the allegations against DMC) by saying DMC has been purposefully overcharging Karmanos for services Karmanos is supposed to buy from us," Mallett said.

"We tried to settle this, but it looks like we are going to trial now," Mallett said.

DMC was acquired by for-profit Tenet Healthcare Corp. last October after Vanguard Health Systems, another for-profit chain, took over DMC on Jan. 1, 2012.

McLaren, a nonprofit system, owns and operates 11 hospitals in Michigan, including Karmanos.

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